U.S. Court of Appeals for the Sixth Circuit Sends Bankruptcy-FERC Conflict Back to Bankruptcy Court

On December 12, 2019, the U.S. Court of Appeals for the Sixth Circuit reversed and remanded (sent back to the lower court for further proceedings) an Ohio federal Bankruptcy Court decision regarding a conflict over the respective roles of the Bankruptcy Court and the Bankruptcy Code (Code) and the Federal Energy Regulatory Commission (FERC) and the Federal Power Act (FPA). The conflict involves the situation when a wholesale power contract is “FERC‑jurisdictional” but a party to the contract is a debtor in bankruptcy and the debtor wishes or may wish to “reject” the contract (which would make its contract counter-parties creditors in the bankruptcy) under the Code.

FirstEnergy Solutions Corp. (FES) and certain of its subsidiaries are currently in bankruptcy in Ohio. FES and a subsidiary asked the Bankruptcy Court to issue an injunction against FERC interfering with the Debtors’ plans to reject certain power contracts that had been approved by FERC. FERC, three contractual counter-parties, and the Ohio Consumer’ Counsel opposed the request.

The Bankruptcy Court decided that it had exclusive and unlimited jurisdiction over this subject while FERC had no jurisdiction, and the court enjoined FERC from taking any action relating to the contracts. The court then applied the ordinary business-judgment rule and found that the contracts were financially burdensome to FES, so it permitted FES to reject them, rendering the contracts “breached” and the counterparties unsecured creditors in the bankruptcy estate.

The opponents appealed directly to the U.S. Court of Appeals for the Sixth Circuit from the injunction and from the contract rejection orders.

The Sixth Circuit concluded “that the bankruptcy court has jurisdiction to decide whether FES may reject the contracts, but that its injunction of FERC in this case was overly broad (beyond its jurisdiction), and its standard for deciding rejection was too limited. Therefore, we AFFIRM in part, REVERSE in part, and REMAND to the bankruptcy court for further consideration.”

The Sixth Circuit stated in part: “To recap, when a Chapter 11 debtor moves the bankruptcy court for permission to reject a filed energy contract that is otherwise governed by FERC, via the FPA [Federal Power Act], the bankruptcy court must consider the public interest and ensure that the equities balance in favor of rejecting the contract, and it must invite FERC to participate and provide an opinion in accordance with the ordinary FPA approach (e.g., under the Mobile–Sierra doctrine), within a reasonable time.”

The Sixth Circuit’s 28‑page opinion is accompanied by a 13-page opinion concurring in part and dissenting in part. The opinions may be found here: http://www.opn.ca6.uscourts.gov/opinions/opinions.php